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Who needs to watch action movies when this stuff is going on? - Feb 2021

Wow! Chaos! Divisiveness! Nasty name calling! Conspiracy theories! Who needs to watch action movies when this stuff is going on?

In our client meetings this past month, many concerns have been voiced by our clients about the impact on the future of the economy from the change in the Presidential Administration, the political environment (polarized parties, presidential impeachment, lawmakers under attack, etc.), and the pandemic.

Interestingly, during all this pandemonium the stock market has been doing simply fine. Shouldn’t we expect the market to go down or be more volatile during times like this? With the change in presidential administrations shouldn’t we expect the market to react with more volatility? Historically, stock market wise, Presidential transitions tend to be a “non’ event. This is because it is Congress, not the President, that creates and passes the laws that impact the market. Notably, now that we have a Democratic led House and Senate, there will not be any stop-gate to legislation which could be viewed as negative to the economy and market by Republicans. Normally, the market prefers a divided government (a different party controls either the House or Senate), as a buffer against changes. This increases stability and therefore a more predictable outcome; markets like that. Many financial professionals expected a market drop after the Georgia Senate race was decided.

So, what is different?

Why have the markets not reacted negatively as predicted after the Georgia Senate race was finalized? We had the attack on the United States Capitol and the markets went up that day! Why? Part of the answer is attributed to the expectation that one party control of the government will allow legislation to pass quickly for programs that will benefit the market. The next relief package will be massive, and there is discussion about a bipartisan infrastructure package. In other words, there is going to be a lot of economic stimulus that will push the markets upward. In addition to this new money flowing into the economy, people who have not been negatively impacted economically during the pandemic have been saving money. The money supply that is known as M2 (checking, savings, and money market account balances), is at a remarkably high historic level. This seems like a disconnect when we are in a recession caused by a worldwide pandemic.  The anticipation is that the high amount of savings will eventually flow into the markets (when people are confident the virus is contained), adding further fuel for market growth.

What to expect?

The overall economy is expected to continue to recover over the course of the next couple of years. The economy is very fractured, with some areas like manufacturing faring well during this time and the obvious plight of other areas of the economy such as restaurants, entertainment and travel being devastated. Eventually taxes will increase, as well regulatory burdens on businesses as promised by the Biden administration.  Long term this is expected to create a drag on the economy, which would eventually negatively impact the stock market. However, for the next year or two, the market may continue moving forward. However, there could be a lot of volatility as the market is at an all-time high. Long term, much will depend on the state of the economy (driven by the success of the vaccinations and control of the virus) and the impact of the new administration policies.

What to do now?

Maintain a diversified approach to investing. After having experienced positive market gains, rebalance periodically so your portfolio allocation does not get out of balance. Do not try to time the market or pick winners or losers based what you hear or see from the “experts”. Be aware of how the changing government policies will impact taxes, Medicare, and Social Security. Historically low interest rates are great for refinancing, buying a house, etc. This is a really bad time to be in investing bonds. It is important that you find out what the alternatives to bonds are.  Update your overall financial plan for the strategies you need to protect yourself and achieve your goals in this changing financial world.

 

Written by: Jay Weyers & Scott McKeever

Weyers McKeever Financial Partners

Your Vision · Our Team

 

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